Understanding local content and the industry hurdles

The 2018 Mining Charter gives mining rights holders in South Africa five years to transition to 70 percent local content spend on mining goods procurement. Accenture believes that reaching the 2021, year-three targets will not be easy. An understanding of local content demands and the industry hurdles that are emerging adds some perspective.

In this series of posts on how local mines are meeting the Mining Charter’s local content targets, the Accenture team has provided an overview, helped set the context, looked at progress to date. In this post, I take a closer look at local content definitions, the formula for determining local content and the industry hurdles that are slowing achievement of targets.

Understanding local content

Local content requirements are geared towards encouraging the procurement of locally sourced and manufactured mining consumables, equipment and components from South African-owned companies as defined by the Mining Charter.

The ownership requirement promotes the participation of historically disadvantaged persons (HDP), women- and youth-owned companies in the manufacturing and sourcing mining value chain.

To determine if procurement spend on a mining goods item can be termed local or not, two factors must thus to be considered:

  • The intrinsic local content value of the mining goods,
  • The ownership profile of the supplier

Intrinsic local content

Local content is defined by gaining a detailed understanding of the mining good, including the origins of its subcomponents and other inputs, from basic components to materials, labour, assembly and other costs, such as logistics. The local content levels of these various inputs results in a composite local content level score for the final mining good.

The Mining Charter has provided a guiding formula for how the local content level should be determined.

LC = [(B – C) /B] X 100

Where:

  • LC – Percentage local content
  • B – Sales price of the mining good
  • C – Value of the imported inputs/components used in the assembly or manufacturing of the mining good

The local content formula for mining goods essentially determines to the difference (denoted in Rands) between the sales price of a capital good, component or consumable and the associated import costs.

The other half of the equation in determining if mining good procurement spend qualifies as local, is determining the ownership profile of the supplier.

Supplier ownership – proudly South African

The mining charter defines categories of supplier ownership based on the level of ownership by previously disadvantaged people in the company, as well as the B-BBEE level achieved by the company.

Historically disadvantaged persons (HDP)-, women-, and youth-owned companies are defined as entities in which South African HDPs, women or youth (South African citizens between the ages of 18 to 35 years) hold at least 51 percent of exercisable voting rights and economic interest. A B-BBEE Compliant Owned company is one with a minimum Level 4 B-BBEE status in terms of the Department of Trade and Industry’s B-BBEE Codes of Good Practice, and minimum 25 +1 percent vote ownership by HDPs. 1

There are local content targets by ownership profile. Of the 70 percent of total mining goods procurement spend on South African manufactured goods, 21 percent must come from HDP-owned companies; 5 percent from women- or youth-owned companies; and 44 percent from BEE-compliant companies.

Other local content considerations 

  • Contract Miners. There are typically suppliers involved in the extraction and/or processing (crushing and concentration) of minerals on behalf of a rights holder. The mining right holder is expected to report on local content procurement using spend data from these contractors. The contract miner is, in essence, treated as an extension of the rights holder and the contract miner’s supplier ecosystem will experience the local content treatment from an intrinsic mining good and ownership local content assessment perspective.
  • Verification body. The South African Bureau of Standards (SABS) has been designated by the Minerals Minister as the body responsible for verifying mining goods’ local content levels. It will issue local content certificates for mining goods that have been verified as being local. The typical engagement process with the SABS is as follows: the mining goods supplier presents its products to the SABS for verification; the SABS issues a local content verification certificate and publishes it on its website, and the mining goods supplier furnishes the mining rights holder with the verification certificates. The mining rights holder’s local content spend level can then reported to the Department of Mineral Resources and Energy (DMRE) based on the mining goods that have a verification certificate.
  • Exempt goods. All non-discretionary spend by a mining rights owner, which includes spend on buildings, roads, utilities (electricity and water), land rates and fuel2, is to be excluded from DMRE local content compliance calculations.

Industry hurdles to overcome

Across our mining clients, we are finding a number of recurring themes with respect to local content assessment. Some of the greatest challenges are ecosystem complexity, lack of awareness around local content requirements and verification (within the mining organisation supply chain and management, as well as among suppliers), and a lack of standardisation across the sector in terms of describing goods and services, and capturing data for local content reporting.

  • Supplier ecosystem complexity. Mining rights holders’ supplier ecosystems consist of hundreds of service and mining goods suppliers. The same mining client may own multiple mining rights with unique and shared suppliers, and some of these suppliers may provide both services and mining goods. The reporting requirement for mining subcontractors further exacerbates complexity.
  • Supplier contracting and categorisation: Supplier contracts often do not differentiate between pure services and mining goods elements. Supplier categorisation (if present) provides limited visibility of the various mining goods groupings, such as capital assets, consumables, materials, etc. While some mining clients have started to develop an in-house categorisation (taxonomy) of mining goods to help them obtain a view of mining goods procured, not all have. The need for a standardised taxonomy for the industry is therefore urgent.
  • Spend data capturing for local content. ERP systems are not optimised for tracking mining goods spend. This leads to onerous manual manipulations during the local content assessment process. And, as there is no product naming standardisation, mining rights holders capture data using free text. The Department of Trade and Industry (DTI) has determined that “free text” purchases make up approximately 70 percent of the value of total procurement3. This makes it difficult to achieve any level of standardisation or control, stymying opportunity for industry localisation of high volume mining goods.
  • Local content requirements awareness. While supply chain and management teams are aware of empowerment requirements from an Enterprise Supplier Development (ESD) perspective, they are not fully aware of localisation requirements for mining goods, DMRE local content reporting requirements and the implications of non-compliance. The expectation of mining rights holders with regards to local content procurement thus needs to be made clear, and that awareness needs to be extended to their teams and supplier base.
  • Definition of service providers classified as contract miners by mining rights holders. The Mining Charter describes contract miners as service providers that are involved in the extraction and processing of minerals on behalf of mining rights holders. This definition presents vagueness as some service providers are involved in preparation rather than pure extraction and processing of ore—e.g., the removal of various layers such as topsoil, overburden.
  • Maturity levels of contract miners: Contract miners vary in maturity from a supply chain management perspective—some have the capacity and capability to meet local content procurement reporting requirements, others don’t. For the suppliers in the latter category the exact provisions for their capitation are unclear.
  • Treatment of contract miner procurement spend. The exact treatment of contract miners procurement spend, in the instance where they are providing the same service to multiple mining houses, is yet to be articulated. Mining houses are opting to treat these suppliers as mining services suppliers in the interim. Given the typical high spend linked to these suppliers, the local content levels of mining goods associated with them remain unaccounted for.
  • Development of a standardised coding and product identification system by the DTI. The DTI is collaborating with the DMRE in the five-year strategy to encourage more local procurement of mining goods. Its creation of a standardised identification system for mining goods for mining rights holders will provide the industry with a catalogue of all components, products and services, making it easier to track local and imported purchases.
  • Duplication of mining goods verification: As mining rights holders procure the same mining goods from the same service providers, duplication of verification is inevitable. With no standard industry taxonomy in place, the issue is exacerbated. Regulatory bodies that verify local content need strategies to prevent duplication of verification efforts.

Join us in the next post in this series as we look at the best practices Accenture is applying at its mining clients—and the Local Content Framework we have developed—to address these issues.

In the meantime, for more on Accenture’s mining capabilities and offerings, click through to Leading with digital in South Africa Mining, our Applied Intelligence Studio in South Africa for Mining and our Metals & Mining newsroom for the latest releases.

Until next time,

Raseroka Goitseona
Functional Strategy Senior Manager, Accenture Africa
goitseona.raseroka@accenture.com

References:

  1. Department of Mineral Resources, Implementation Guidelines for the Broad-based Socio-economic Empowerment Charter for the Minerals Industry, 2018
  2. Department of Mineral Resources, Implementation Guidelines for the Broad-based Socio-economic Empowerment Charter for the Minerals Industry, 2018
  3. Engineering News, article, 2019, Accessed online June 2021; https://www.engineeringnews.co.za/article/dti-forges-ahead-with-product-standardisation-task-2019-06-14

Goitseona Raseroka

Senior Manager – Accenture Strategy & Consulting, Africa

View Profile